Economics and the Law from Posner to Post-Modernism

By Blackstone, Erwin A.; Bowman, Gary W. | Atlantic Economic Journal, December 1999 | Go to article overview

Economics and the Law from Posner to Post-Modernism


Blackstone, Erwin A., Bowman, Gary W., Atlantic Economic Journal


This overview presents the core elements of the different perspectives on the varied traditions within law and economics. One perspective considers what economics has to offer the law. This includes the microeconomic analytic framework based on self-interest to predict and evaluate the actions of consumers and firms (in traditional microeconomic analysis), voters and their elected representatives (in public choice theory), common law and settlements, torts and injury law (the Chicago school of law and economics), and contract law (in neoinstitutional transaction cost and agency issues).

Economics and the Law

Economics focuses on resource allocation and an individual's choice to achieve happiness. Although much analysis covers household and firm purchasing and production decisions, in recent decades other decisions have been investigated regarding marriage, crime, voting, the law, and the constitution. While economics does apply to a single isolated individual--a Robinson Crusoe--much economic (and legal) analysis relates to the interaction of people and groups. The pursuit of self-interest is presumed to guide decisions ranging from purchases and production to whether to break the law. Self-interest forms the basis of the economic explanation of the behavior of people.

The traditional economic focus on resource allocation involves explaining how people behave, evaluating how this behavior affects the happiness of others, and determining the net effect on the happiness in society, that is, the effect on economic efficiency. While economic efficiency may be largely taken for granted by those who enjoy a high standard of living, the economic system produces the necessities of life. In the extreme case of zero economic efficiency, there would be no necessities and virtually the entire population would die in a very short time. Basically, any reduction in economic efficiency is a cost to society and reduces the standard of living. Consequently, economists (in general) and the Chicago school (in particular) tend to put much emphasis on efficiency and prefer not to lower it except for clear and well-defined reasons.

One source of apparent tension between law and economics may be the tendency of some to think of economic activity and legal issues in the context of a zero-sum game where the gain to one person must come only with an equal loss to one or more others. In a superficial sense, this may be true when A pays B X dollars as the consequence of a transaction or court case. For the economic and legal system, this is not even an approximation and would be so only if economic efficiency were constant.

Mercuro and Medema have presented a very thoughtful and comprehensive "overview of the core elements of the different perspectives on the varied traditions within Law and Economics" [p. 1]. They consider several traditions: the Chicago school of law and economics, public choice theory, institutional and neoinstitutional law and economics, the New Haven school, modem civic republicanism, and critical legal studies. Their work will permeate comments on and evaluation of the current state of economics and the law.

A legal system is necessary to any economic activity. Property rights to at least one's own body, time, food, and other necessities are essential. Furthermore, any economic interaction requires some property rights and a legal system that limits, for example, theft, assault, and murder. Market transactions and contracts are generally voluntary. Hence, they are in the self-interest of each party and are beneficial for them (providing there are no third parties who are adversely affected) and for economic efficiency. Law that defines property rights and allows enforceable contracts is essential to any (economic) life. However, where should the law limit contracts? Are there externalities to the contract? Are there other reasons for limitations? As Mercuro and Medema argue, Coase [1960], who is associated with the Chicago school, has shown that contracts are an even more powerful tool in promoting economic efficiency and in resolving effects on third parties than was previously thought.

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